The Financial Reporting Council (FRC) has decided to adopt less than half of its plans proposed changes to the UK Corporate Governance Codewith many ESG-related proposals being dumped, following feedback from the consultation on this issue.
Scrapped proposals This includes rules relating to the role of audit committees in the field of ESG, and changes to existing code provisions around diversity, overboarding and committee chairs engaging with shareholders.
One of these rejected proposals was that the remit of audit committees would be expanded to include narrative reporting, including sustainability reporting, and ESG metrics where appropriate.
During the consultation period, the Chartered Governance Institute had called on the FRC, as regulator, to provide guidance on how and what companies should report on their climate ambitions and transition plans.
The FRC is also believed to have clearly linked remuneration to the company’s performance, purpose and values in its updated plans, with specific mention of ESG objectives.
Reference to inclusion, giving equal weight to all protected and non-protected characteristics, and encouraging companies to consider diversity beyond gender and ethnicity is also considered outdated.
Of the 18 originally planned revisions to the FRC Code, changes to internal controls, relating to adequate accounting records and the preparation of financial statements, and risk reporting, will comprise the bulk of the proposed measures.
There will also be a small number of changes that streamline and reduce duplication of work associated with the code, with the aim of reducing the burden on businesses.
A number of other proposals will also not be implemented following the government’s recent decision to withdraw its statutory instrument relating to an audit and assurance policy, distributable profits reporting and resilience declaration requirements.
The FRC intends to publish an updated governance code in January 2024.
Richard Stone, chief executive of the Association of Investment Companies (AIC), welcomed more limited changes to the code, saying the original proposals were “disproportionate and poorly targeted”.
“The FRC has listened to the concerns of the business community and, although we do not have all the details, appears to have changed course accordingly. This is a very positive development, but should not be the last word from policymakers on the right regulatory balance.”
He added that there are still “serious doubts” about the government’s proposals to require larger listed companies to introduce managed shared audits, or force them to appoint challenger accounting firms.
Such rules “would limit choice,” he said, and be “too burdensome” for companies, and would not increase competition in the audit market or improve the quality of audit services.